The EU Market Abuse Regulation (MAR) came into effect on July 3, 2016. It replaced the EU Market Abuse Directive (MAD) and contains rules on insider dealing, unlawful disclosure of inside information and market manipulation that apply throughout the EU. In addition, the prohibitions and requirements set out in MAR apply to acts or omissions that occur in a third country like the United States. The extra-territorial application of the EU market abuse regime is nothing new: MAD previously had extra-territorial effect and EU Member State regulatory authorities pursued enforcement action against individuals and firms who had committed market abuse from outside their jurisdiction. However, the implementation of MAR was an important moment for the EU market abuse regime on the basis that it significantly expanded the types of financial instrument that come within the regime and sets out more detailed compliance requirements.
Under MAD the market abuse regime covered ‘financial instruments’ that were admitted to trading on EU “regulated markets”, such as the main market of the London Stock Exchange. The range of instruments that were caught by the definition of ‘financial instrument’ included transferable securities (covering shares in companies and other securities equivalent to shares in companies, bonds and forms of securitised debt), certain types of futures, forward agreements, swaps, options and derivatives.
However, under MAR the scope of financial instruments has been significantly expanded. The market abuse regime covers not only financial instruments traded on an EU regulated market but also financial instruments traded on a multilateral trading facility (MTF) and organised trading facility (OTF). MTFs encompass many broker-operated trading venues and listing venues that are not regulated markets, such as the Irish Global Exchange Market and the Luxembourg EuroMTF. OTFs are a new type of trading venue that has been created by the revised Markets in Financial Instruments Directive (known as MiFID II) for the trading of non-equity instruments such as bonds and derivatives. MiFID II comes into force on 3 January 2017 and, importantly, reclassifies emission allowances as a ‘financial instrument’ which will also fall within the scope of MAR.
It is also worth noting that the market abuse regime under MAR applies to financial instruments whose price or value depends on or has an effect on the price or value of a financial instrument traded on a EU trading venue (regulated market, MTF or OTF) . This includes, but is not limited to, credit default swaps and contracts for difference. Furthermore, for the purposes of the market manipulation offence, spot commodity contracts (which are not wholesale energy products) are caught in certain circumstances as well as other financial instruments including derivative contracts/instruments which transfer credit risk, where the transaction or behaviour has an effect on the price or value of a spot commodity product. The manipulation offence also extends to conduct in relation to benchmarks,
By expanding the scope of financial instruments it is much easier for non-EU firms to be caught by the EU market abuse regime. Take for example the following scenario:
- US company ‘A’ trades with US counterparty ‘B’ in the shares of US issuer ‘C’
- US issuer ‘C’ shares are listed on the New York Stock Exchange (NYSE)
- The trades occur on the NYSE.
- US issuer ‘C’ website refers solely to the NYSE listing.
- US issuer ‘C’ shares also admitted to trading on an MTF in London.
- US company ‘A’ and US company ‘B’ will be subject to MAR, since US issuer C’s shares are also traded on the London MTF, even though trading between the two US entities occurs solely on the NYSE.
The need for non-EU market participants to have the necessary systems in place to monitor forensically the instruments they trade has become ever more important. To some extent firms will be assisted by the European Securities and Markets Authority which is required under MAR to publish a consolidated list of financial instruments that are admitted to trading or are otherwise traded on all EU trading venues. However, this list has been delayed until the implementation of MiFID II. Notwithstanding this, MAR further provides that ESMA’s consolidated list should not be treated as exhaustive so there should be some caution when relying on it.
When compared to MAD, MAR also sets out much more detailed compliance requirements including those relating to market soundings, disclosure of inside information, insider lists, market surveillance, suspicious transaction reporting and investment recommendations. Integrating the MAR requirements into the compliance framework has been a significant challenge for non-EU firms although this is important when they are engaging in activities that bring them within scope of the requirements.